In accrual accounting, revenue is included as income when it is generated. The work is done, the company is paid, and the amount is entered as income. Only earned revenue – money exchanged for a good or a provided service is included on the income statement.

Tip

Income that has been generated but not earned, aka unearned revenue, is not included on the income statement and is considered a liability.

What Is Unearned Revenue?

Unearned revenue is income you have on your books that is waiting for the goods or services to go with it. In other words, it's prepaid income. For example, you sign a three-month, $1,000 per month deal with a customer in January, and the customer pays you $3,000. The entire $3,000 goes into the Unearned Revenue account because you've been paid for work you have not yet completed.

At the end of January, you've earned the first of the three month's income or $1,000. That $1,000 is considered income and goes on the income statement for January. The other $2,000 is still unearned because it is for work you're going to perform in February and March, so you do not include it in the income statement for January.

Examples of Unearned Income

There are several instances where a company could generate revenue before providing the goods or services that go with it. One example is a newspaper publisher. People pay for an annual subscription to a paper. If a subscription is $120 a year, at the beginning of the year, $120 is placed in the unearned revenue account, and each month, $10 is taken from that account and moved to the revenue account because the newspaper provided a month's worth of newspapers.

In accounting terms, a liability is created because the company received revenue for papers it has not yet delivered. As the papers are delivered, the liability decreases and the newspaper's income increases. Another example is a deposit. If a company takes a deposit for a project, until the portion of the project the deposit represents is completed, it is considered unearned revenue.

Where Does Unearned Revenue Go?

Unearned revenue is included on the balance sheet. Because it is money you possess but have not yet earned, it's considered a liability and is included in the current liability section of the balance sheet. In February, after you complete the second month's worth of work, you can then take $1,000 of the unearned revenue and claim it as revenue. This increases your revenue and decreases your liability. After you have fulfilled your obligations in March, the unearned revenue account is zeroed out because you have finally earned the entire amount you were paid.

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About the Author

K.A. Francis has been a freelance and small business owner for 20 years. She has been writing about personal finance and budgeting since 2008. She taught Accounting, Management, Marketing and Business Law at WV Business College and Belmont College and holds a BA and an MAED in Education and Training.

Francis, K.A.. (2019, March 01). Do Unearned Revenues Go Towards Revenues in Income Statement? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/unearned-revenues-towards-revenues-income-statement-24103.html